MARKET REVIEW
- U.S. markets moved sharply (although not broadly) higher from March lows in response to dramatic fiscal and monetary action.
- Social distancing drove very rapid business model change, rewarding companies that support virtual work, and harming service and high contact businesses.
- COVID-19 put enormous physical and economic strain on healthcare systems and providers, while healthcare solutions providers with exposure to diagnostics and vaccine development were embraced.
PORTFOLIO
- The Fund’s Institutional (NESIX) and Retail classes (NESGX) returned 34.92% and 34.72%, respectively, in 2Q20, outperforming the Russell 2000’s 25.42% results. YTD as of June 30, NESIX returned 14.87% and NESGX returned 14.50%, considerably outperforming the Russell 2000’s -12.98% YTD results.
- Overweights in information technology and underweights in retail, financials, energy and utilities were all contributors to performance.
- Specific tech/software stocks accelerated due to the remote work transformation that will continue to drive investment in technology hardware, software and services.
- The Fund’s top two contributors were GenMark Diagnostics, Inc. (GNMK) and MaxLinear, Inc. (MXL). GenMark’s equipment and testing supplies were in high demand from healthcare facilities during the crisis. MaxLinear’s stock recovered after announcing its intent to acquire certain Intel (INTC) assets; it also saw stronger demand for its connectivity and wireless products.
OUTLOOK
- Data infrastructure delivery systems are experiencing heavy utilization, which requires investment and optimization to expand capacity for this increased demand; we see this as an acceleration within a long-term trend not yet fully recognized by the market.
- We continue to seek investments in communications infrastructure, data center content, 5G devices and infrastructure, military modernization, software and security and specialty material manufacturers, as interest in new U.S.-based semiconductor factories grows, and new material composites show broad industry promise for improvements in form factor, weight, durability, and safety. Note here our interest in diversification across end-users, not just sector representation within the portfolio.
- Markets are extended, and while economic activity has bottomed, it has not normalized. We anticipate the uncertainty of COVID-19 will cause volatile markets, likely to trade within a range generally responsive to health-related news and, over a longer period, specifically beneficial for that subset of businesses well-positioned for social and business model change. Thus, we will focus on finding those businesses likely to thrive during turmoil, while continuing to trade opportunistically.